Forty-eight Cleveland Census tracts were nominated in March as opportunity zones, special areas where investors will be able to delay or avoid capital gains taxes by putting profits from unrelated investments into real estate projects, infrastructure and businesses. The tracts span relatively vibrant and distressed parts of the city, from downtown Cleveland and West 25th Street in Ohio City to vacancy-riddled neighborhoods on the east side.
(Chuck Crow/The Plain Dealer)

CLEVELAND, Ohio - A new federal program, slipped into last year's tax overhaul with little fanfare, could spur private investment across Ohio's low-income communities, including parts of Cleveland, Akron and their suburbs.

On March 21, the state released a list of 320 Census tracts nominated as opportunity zones, where investors will be able to delay or avoid paying capital gains taxes. Now Ohio is waiting for the U.S. Department of the Treasury to sign off on the choices.

In Northeast Ohio, the selections - 64 tracts in Cuyahoga County, alone, and scattered sites from Lorain to Youngstown - are being met with a mix of optimism, confusion and unease.

The tax-reform package established the program's framework, with the goal of boosting private investment in communities that haven't fully recovered from the Great Recession. The IRS and Treasury still have to outline the regulatory details, though, in a process attorneys and consultants hope will take only months, rather than years.

Local economic-development experts and public officials believe opportunity zone status could make it easier to close funding gaps for projects already on the drawing board - and to deepen the pool of investors for new ventures, from start-ups to infrastructure, real estate development and manufacturing expansions.

"As long as the economy holds - and that's always a big 'if' lately - I think this is going to be a great tool that's going to make developers sit down and take a look," said Tracey Nichols, a private financial consultant and past economic development director for the city of Cleveland.

Critics, meanwhile, are asking whether the program actually will ameliorate distress.

They point out that downtown Cleveland, University Circle and other relatively vibrant parts of the city made the cut, while harder-hit areas, including parts of Hough and Slavic Village, did not.

The opportunity zones span neighborhoods where houses recently have sold for as little as $9,000 - and for more than $600,000.

"Parts of Tremont shouldn't be in play for this," said Richey Piiparinen, a Cleveland State University demographer who also scoffed at the inclusion of West 25th Street in Ohio City.

Cleveland's Fairfax neighborhood, which runs between Euclid and Woodland avenues and East 71st and East 105th streets, was included on the state's list of opportunity zones sent to the federal government for certification. The nonprofit Fairfax Renaissance Development Corp. recently kicked off the first project - a community green space - in a broad area called Innovation Square, where there's room for nearly 500 new houses and apartments on vacant lots.Marvin Fong/The Plain Dealer

A 'balancing act between need and opportunity'

Nearly 1,300 Census tracts in the state, including virtually all of Cleveland, were eligible for opportunity zone status based on their poverty rates and median household incomes. But under the program's parameters, states could nominate only 25 percent of qualified tracts.

That limit, and the program's investor-focused design, posed a challenge: Finding areas that, though distressed, have enough happening that investors will see a chance to profit.

There's a "balancing act between need and opportunity," said John Lettieri, co-founder of the Economic Innovation Group, a bipartisan public policy group based in Washington, D.C.

Or as his fellow co-founder, Steve Glickman, put it: "We can find the most distress. It's hard to find the places that are the most investible."

The five-year-old organization, which ranked Cleveland last year as the most distressed large city in the nation, helped to develop opportunity zones. Authored by legislators including former Ohio Rep. Pat Tiberi, a Columbus-area Republican who resigned from Congress last year, the program offers a few carrots to investors.

First, an investor with capital gains - such as profits from selling stock or real estate - can delay paying tax on those gains by putting the money into a fund focused on opportunity zones.

Second, investors who maintain their opportunity-fund investments for five to seven years will be able to avoid paying taxes on a portion of those original gains. Unless Congress modifies the law, though, the bulk of the gains still will become taxable at the end of 2026.

Third, investors who stick around for at least a decade won't have to pay taxes on any new gains from their opportunity-zone investments.

Steven Mount, a Columbus attorney who specializes in tax credits and real estate, said that long-term play is the real opportunity.

"There's no investor that will invest in this program for the tax benefit alone. It's not enough," said Mount, a partner with Squire Patton Boggs. "They will require some economic return. ... These need to be good projects, with profit potential."

That explains why picking the most troubled Census tracts might not be the best bet.

The Ohio Development Services Agency solicited online submissions - from anyone, including cities, counties, chambers of commerce, property owners and developers - for tracts through March 2. As part of the applications, the state asked for information about existing and planned investments in the tracts.

The agency received nominations for 890 tracts and whittled the list to make it roughly balance at 25 percent across cities, counties and regions. Officials gave higher marks to tracts submitted multiple times - by a city, a county and a developer, for example - and submissions that showed regional collaboration.

The Greater Cleveland Partnership and the Fund for our Economic Future submitted a proposal for 84 Census tracts. The state asked applicants seeking approval for multiple tracts to prioritize them, which is why the tracts are numbered. Sixty-four of the tracts made the state's final cut.Greater Cleveland Partnership

Cuyahoga County proposed 70 tracts, two-thirds of them in Cleveland. The regionally-focused nonprofit Fund for our Economic Future and the Greater Cleveland Partnership, the metropolitan chamber, jointly submitted 84 tracts in Cuyahoga County.

Euclid secured nominations for tracts along Interstate 90, a corridor that's home to big investments including Lincoln Electric's new welding technology center and a massive Amazon fulfillment center being built on the former Euclid Square Mall site. The state also approved a cluster of tracts spanning property in Warrensville Heights, Maple Heights, Bedford Heights and North Randall, including another huge Amazon project site where Randall Park Mall once stood.

Lakewood missed out in a bid to land opportunity zone status for the Lakewood Hospital redevelopment site. Cleveland Heights has one approved Census tract, along Taylor Road where the inner-ring suburb abuts East Cleveland. But impoverished East Cleveland, which sought the designation for two tracts including the one that's home to GE Lighting's Nela Park, struck out.

"The Nela site ... is an obvious site," said Michael Smedley, the city's chief of staff, who is worried about General Electric Co.'s efforts to sell its lighting business. "We have to have some plans to deal with it. The potential sale of the business is important, but we have to be able to, if at all possible, create opportunity so the site doesn't go dark. And it's much more than just a local issue. It's a countywide issue."

This color-coded map shows requested, approved and rejected opportunity-zone tracts in the city of Cleveland, compared with the city's initial application to the state.City of Cleveland

Cleveland searches for nexus of distress, appeal

The city of Cleveland proposed 73 Census tracts to the state and ended up with 48 wins - 45 from its own request and three that weren't on the city's original list but that won support from other applicants. Most of the scrapped tracts were on the west and south ends of the city.

During an interview, city officials said they looked at areas that are growing or that are on the fringes of growth, taking a similar tack to Mayor Frank Jackson's neighborhood initiative that recently kicked off in Glenville, north of University Circle. The hubs included downtown, the Euclid Avenue corridor, the Opportunity Corridor road project that will run from East 55th Street to University Circle, the lakefront and the city's industrial valley.

Ed Rybka, the city's regional development chief, said it's tough financing projects everywhere in Cleveland - even downtown, where development still subsists on a layer cake of private cash and public subsidies. "If there's an opportunity to attract other private capital sources to fill those gaps, requiring less city participation, that frees up city dollars" for other areas, he said.

Cleveland's opportunity zones will have to compete for investors against other such zones nationwide, said David Ebersole, the city's interim economic development director. It's not clear exactly what that competitive landscape looks like, since fewer than half the states gave nominations to the federal government in March. The rest took advantage of a 30-day extension option.

Freddy Collier, the city's planning director, described the city's Census tracts as a blend of healthier and weaker, built-up and in need of building. "There's strong communities as well as challenged communities that are incorporated in that mix," he said. "I think, from an equity perspective, the tracts that we put forth are pretty strong."

Piiparinen disagreed, pointing out that the map of qualifying tracts was based on Census data that are a few years old and lag what's happening on the ground.

Councilman Matt Zone, whose Detroit Shoreway neighborhood and nearby Census tracts didn't make the state's cut, also expressed skepticism about the list - and frustration with the swift selection process, which didn't include Cleveland City Council hearings.

"We are the policy-making body of government. If we're not influencing policy that is being made at the city, state, regional or federal level, then we're not doing our role," he said.

At this point, though, the decision-making rests in the hands of federal bureaucrats, who will answer key questions about how opportunity zones will work - and how much of a leg-up they'll offer to downtrodden communities.

Responding to concerns that the tax-favored zones will merely help along projects that already were likely to happen, executives at the Greater Cleveland Partnership said they believe the program has potential to shift projects to lower-income neighborhoods or change investors' minds - if local communities do a good job of matching investments to investors.

"I don't think it's a panacea fix for everything," said Deb Janik, the partnership's senior vice president of real estate and business development. "You're constantly looking at the Sudoku game of economic development, and it's like how do you marry the right resources to the opportunities."